In May 2022, Jasper Pellets – a wood pellet manufacturer located in Ridgeland, South Carolina – filed for Chapter 11 bankruptcy.
This is noteworthy for a few reasons but hits close to home for me and came to my attention because, as most of you know, I smoke meats on a pellet smoker. I enjoy spending my weekends smoking brisket, pulled pork, or chicken. And since my smoker is fueled by wood pellets, one less manufacturer means that they may become harder to find. This is important news to the millions of smokers around the United States.
While pondering this potential predicament over some steaks on the grill and with an adult beverage in my hand, it dawned on me that at least as big of a story lies in the lesson of the municipal bonds that funded Jasper’s expansion.
Most of you know that about 40% of Worthington Wealth Management’s active management is in municipal bond products and we love teaching our clients about the wonderful nuances of these investment products.
First lesson: Even though municipal bonds are issued by municipalities, not all municipal bonds are backed by those governments. There are two main types of municipal bonds: General Obligation Bonds and Revenue Bonds.
Where General Obligation Bonds are backed by the general taxing power of the issuing authority (the state of South Carolina in this case), Revenue Bonds are backed by the revenue of a specific source – in this case it’s Jasper Pellets.
A bankruptcy of a project funded by General Obligation Bond means the municipality continues to collect from residents and taxpayers to pay bondholders, but in Revenue bonds it means the revenue stops. General Obligation bond owners don’t notice because the municipal government backs the bonds; but when Revenue Bond owners’ bonds go bust the income stops and they get in line with other creditors at the bankruptcy hearing for, usually, cents-on-the-dollar.
There are hybrids that fit in the middle. Revenue bonds for municipal services like water or sewer are paid for from the users of the system and are not backed by the full taxing power of the government like General Obligation bonds. Usually, however, the city’s bond rating suffers if they don’t stand behind their water/sewer system’s finances, so they go the extra mile to make sure those types of Revenue Bonds have the government’s stamp of approval.
There are more details in the deeper nuances, but all bonds are not the same and, even in asset classes like municipal bonds issued by municipal governments, the lesson here is that not all bonds issued carry the same assurances. Not knowing the real risk could mean your income going down, maybe not being able to afford pellets and, possibly, losing your investment.
Understanding the difference means that, in this story, the bonds are bust and pellets are harder to find.
Smoking meat is not nearly as enjoyable when the fire is lit with investment losses.